A roadmap for the impact revolution

ImpactAlpha, Mar. 20, 2018 – Impact investing has been described as a quiet revolution within markets. Watch out — the revolutionary drumbeat is getting louder.

The insurgents are storming the financial barricades armed with metrics and ratings systems, suites of new investment products and trainings for a new generation of bilingual professionals fluent in both finance and social impact.

Now comes a roadmap for the revolution from the Global Impact Investing Network, the decade-old coalition of first-moving impact investors, to “lead the way to a new future where impact is embedded in all investment decisions and impact investing is an option for everyone.”

The roadmap defines success for impact investing as much more than simply a growing pot of investment capital for solutions to social and environmental challenges. The new battle plan sets its mark on a transformation of the global financial system itself.

Introducing the “Roadmap for the Future of Impact Investing,” the GIIN’s Amit Bouri said impact investing has indeed sparked a movement and moved hundreds of billions of dollars into solutions to social and environmental challenges. But the industry, he says, “is still generating only a fraction of the impact required to address the global challenges facing our communities and our planet.”

Progress to date, he says, is “dwarfed by persistent, troubling issues such as climate change, inequality, and social division.” Legacy financial systems, he suggests, won’t be able to meet targets like the Paris Climate Agreement or the Sustainable Development Goals.

The five- to seven-year action plan laid out by the GIIN is surprisingly practical. Much of it revolves around finally putting in place long-talked about industry infrastructure to equip investors to more efficiently make investment decisions informed about their social, environmental and economic impact.

More than 350 impact investing leaders and practitioners, including many of the biggest names on Wall Street, contributed to the plan, which aims to shift public thinking on the very purpose of capital in society.

Sir Ronald Cohen, the British venture capitalist and chairman of the Global Steering Group for Impact Investment said such an “Impact Revolution is essential and inevitable if we are to mobilize investment at scale to improve lives and the planet.”

The plan

Broad-scale internalization of “impact” requires adoption of a set of market and trading mechanisms. These include rating systems, metrics and new product options, as well as fund managers and advisors who are trained and incentivized to deliver impact alongside returns.

The GIIN’s roadmap, part social movement building, part nuts and bolts market-building, outlines six categories of action:

1. Strengthen identity. The roadmap calls for the kind of shared purpose that has animated past movements. The GIIN will lead a process to establish a set of principles to guide future investments. Getting to impact-measurement best practices and clarity on the roles of capital across the returns spectrum are key to widespread adoption.

2. Shift the paradigm. Actions include a global campaign to redefine the role of capital in society and a fundamental update to financial theory to incorporate impact alongside risk and return. The roadmap calls on investors to align incentives to let impact drive allocation and compensation decisions. Already, firms including Vox Capital, the Media Development Investment Fund, and GAWA Capital, tie their fund managers’ carried interest to impact. Pay-for-success products also are demonstrating how to tie impact to performance.

3. Expand the suite of products. With the growth of impact investing has come a demand for products that meet the full spectrum of investor needs and preferences. The roadmap highlights the need for growth in retail products (currently largely limited to notes from Calvert Impact Capital, Triodos Bank, Enterprise Community Partners, as well as public stock trading platforms like OpenInvest and Swell). Institutional scale products also are needed, especially funds with more than $500 million in assets. The action plan calls on investors to make more bets on new fund managers, as the Capria Network has done, and innovative finance vehicles, like the blended capital deals on the Convergence platform.

4. Equip investors. Impact investing markets need third-party ratings of investment products that incorporate impact to help investors compare and select opportunities. The GIIN says the industry must build on existing rating systems such as GIIRS, which has rated 90 funds to date. Nearly all of the legacy rating services are moving into ESG (for environmental, social and governance) reporting, and even impact. There’s also a need, and opportunity, for more impact investment banking services such as deal origination and syndication, like those provided by Calvert Impact Capital, ClearlySo and Intellecap.

5. Train professionals. Industry associations of finance professionals must lead an effort to engage and train mid-career financial advisors. Many struggle to translate client demand into capital deployed into impact investments. The industry must also help boost the supply of impact investment opportunities by supporting the legion of incubators, accelerators and networks nurturing impact-oriented businesses.

6. Enact policy. Policy can both remove barriers and incentivize impact investments. Tax incentives for green bonds in the Netherlands; the Social Investment Tax Relief in the UK; and the New Markets Tax Credit in the United States are models for promoting impact investments by changing the effective financial return of qualifying investments. A refined definition of fiduciary duty would consider impact. Updated regulations should incentivize impact measurement.

Mapping the roadmappers

Everyone, it seems, wants to provide a roadmap (and the GIIN, to its credit, rounds them up in its report). The CFA Institute, for example, last year rolled out a report on “the future state of the investment industry” keyed to ESG drivers. The European Union’s High-Level Expert Group on Sustainable Finance recently adopted financial-systems recommendations, including disclosure about sustainability decision-making, an EU-wide label for green investment funds and a classification to clarify what is “sustainable.” The report and the European Commission’s “action plan” will be discussed this week in Brussels.

The Good Capital Project tackles many of the same practical challenges laid out in the GIIN’s new map. The project’s Grand Challenges, for example, seek to increase the flow of “good” capital by creating a shared understanding of definitions, efficient product design and distribution, support for entrepreneurs, effective use of impact measurement and management. Like the GIIN’s roadmap, the Grand Challenges call for developing investable solutions and building legal structures and policy. Good Capital seems to stop short of “systems change,” however, aiming to grow the size and influence of impact investment approaches.

The “Roadmap for a Sustainable Financial System,” an effort led by the World Bank and UN Environment, does indeed seek a makeover the global financial system, sustainably. That roadmap envisions a financial system that integrates sustainability into decision-making. It calls for the system to fully account for both positive and negative externalities, and allocate resources toward inclusive and sustainable initiatives.

The roadmap from United Nations and the World Bank calls for more emphasis on improving the capacity of investors to use sustainability data and more attention to harnessing the power of financial technology. Sustainability must be central to investment strategy, not a sideshow.

Grand vision

The roadmaps are likely to be less influential than the flow of capital itself in remaking legacy financial markets. Increasing investments in climate action and clean energy, women’s leadership and diversity, and delivering on the UN’s 17 Sustainable Development Goals are already shaping an impact revolution.

What the plans can do is promote alternative visions. In the more constrained vision for impact investing, we would continue to tally the incremental addition of billions in commitments to impact investments each year. We’d periodically cheer new big-name market entrants. Impact investing would eventually move real money and have real measurable impact, but remain on the sidelines of mainstream financial markets and of global development.

The more ambitious vision, reflected in the GIIN roadmap, is of a world in which impact investing has simply become investing, foretelling systemic change that fundamentally redefines the role of finance.

In that vision, companies are accountable to all of their “stakeholders”: shareholders, employees, customers, suppliers, affected communities, and local and global environments. In this world, economics has no use for the term “externalities” because firms have internalized them, positive as well as negative. Waste becomes valuable, ecosystem services get paid for, prevention can be monetized, inclusion creates a bigger pie and diversity pays a dividend.

In that not-so-far off world, investors have added impact to their risk-return profiles and don’t remember a time where they didn’t analyze comprehensive social and environmental data to better understand risk and opportunity. Markets are no longer indifferent to global challenges like inequality and climate change; they’re channeling trillions of dollars to solve them.

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Reader responses:

Dennis, I really want to celebrate this and to be pleased that we are using words like revolution and radical transformation in terms of the financial sector, however, there is a glaring omission in this manifesto. GIIN is silent on revolutionizing power relations and diversity within the financial sector.

Is the impact investment community that tone deaf? Do portfolio managers and the ecosystem builders in the impact world truly believe that they can tackle the SDGs on a global scale, and have any success if the composition, culture and perspectives of those who sit at the table do not change? SMH.

Looking forward to your response and hope to actually generate discussion and engagement on this.

And let me say who am I, an African heritage mature women with an incredible pedigree in international development coupled with serious finance experience and skill. I am a blended finance pioneer, before that term even existed. I need to be convinced that this revolution is for real. Show me and then let’s develop an action plan for tackling structures and cultures of power and privilege in the financial sector, so that the intended beneficiaries of impact investment are included as genuine partners.

Dr. Marcelle raises a very important point. Greater diversity and equity will be essential to building a future in which the financial markets work for everyone. Although it may not be reflected in this article, it is certainly an important component of our vision. A sustainable financial market is not possible without meaningful shifts in power dynamics — specifically the representation of women and other historically underrepresented groups in high-level positions within the investing industry. Further, the voices of beneficiaries and other affected parties will need to be systematically included in investment decision-making.

This Roadmap is but the first step in a process. Now begins the fun and interesting phase of implementation. We intend to engage with field-builders around to world to bring these actions to life, and we welcome the opportunity to work with Dr. Marcelle in helping drive this transformation in financial markets.